Kinder Morgan’s pipeline deal with feds diminishes hopes for growth

Analysts at CIBC have cut their target share price for Kinder Morgan Canada Ltd. and say its future is cloudy in the wake of its deal to sell its biggest current and growth asset — the Trans Mountain pipeline system — to the federal government.

They say in a research report the company will be left cash-rich but prospect-poor after it agreed to sell its existing 300,000-barrelper-day pipeline and the delayed 590,000-bpd expansion project for $4.5 billion.

Kinder Morgan Canada stock fell again Wednesday, continuing the post-deal trend that saw it close nearly three per cent lower at $16.10 on Tuesday. It dipped to $15.95 at the close Wednesday in Toronto.

CIBC slashed its 12-month price target to $17 from $22 because of its lower expectations of future growth in revenue and dividends for Kinder Morgan shareholders.

It says the company has a great deal of capital available, given Ottawa’s cash deal and the plan of its 70 per cent owner, Houston-based Kinder Morgan, Inc., to spend more than $15 billion in overall growth capital over the next five years.

But the note adds that it’s unlikely that an acquisition would allow it to offset the benefit from the $7.4-billion expansion of its Trans Mountain pipeline.

Kinder Morgan Inc. created its Canadian subsidiary in a $1.7-billion initial public offering last year. But the deal means investors will no longer be able to share in the financial upside of the expansion project.

Kinder Morgan Canada estimates the pipeline deal is worth about $12 per restricted voting share, after capital gains tax — about threequarters of its total share price.

It will continue to hold an integrated network of crude tank storage and rail terminals in Alberta. It will also own a terminal in Vancouver and the Cochin Pipeline system, which transports light condensate from the U.S. to Fort Saskatchewan, just northeast of Edmonton.

CIBC notes the retained assets were expected to contribute about half of the company’s 2018 EBITDA of about $400 million, excluding construction funds. It expects after-tax proceeds for the approximately 30 per cent of Kinder Morgan Canada not owned by its Houston-based parent to be about $1.25 billion. It says it plans to continue to invest in Canada.